A tiny London trading firm is at the centre of a shadowy chain of international deals involving the carbon market’s first “rogue trader”. A mystery investor made a £1.8m profit last week by selling invalid carbon permits to unwitting buyers in Europe — which caused a temporary trading freeze at two of the main carbon trading exchanges.
Microdyne, a firm registered in Cyprus but based in Edgware, northwest London, confirmed this weekend that it bought and sold the permits to the mystery trader.
Bluenext, the exchange where the permits were sold has launched an investigation.
The scandal is the latest to damage the credibility of the €100 billion (£90 billion) carbon trading market and is expected to lead to a shakeup of rules governing Europe’s flagship pollution reduction scheme.
The story began in Hungary, where the government sold 800,000 carbon credits known as CER’s, or carbon emission reduction certificates, to a trading firm called Hungarian Energy Power. The company, whose website was set up only two weeks ago, bought them for €9 each, or about €7m. HEP then immediately transferred them to Microdyne, which in turn sold them to a trading firm in Hong Kong, which sold them via Bluenext to a number of European brokers and banks at about €11.50 to €12 each, generating a quick profit of €2m.
The problem was that the credits were no longer valid for European buyers. It is thought that Hungary sold them on the understanding that the credits would eventually go to Japan. While Japan falls outside Europe’s pollution reduction scheme, it can still use the credits to meet targets under the UN’s climate change framework. They are not supposed to be “recycled” back into Europe.
A handful of buyers have threatened to reveal the identity of the rogue trader unless they can sell back the credits at the price they paid. Anvar Kasimov, owner of Microdyne, said in a letter this weekend that the Hong Kong group it sold them to knew they were recycled before selling them on. He said contract rules barred him from revealing the firm’s identity.
The episode is not the first to hit the carbon market. Campaigners have long criticised the system, which allows first world firms to fund clean energy projects abroad, and receive credits for them, as a way to meet offset their emissions at home. They argue it is too opaque and not sufficiently policed.
Within the past year-and-a-half two companies responsible for auditing whether clean energy projects qualify to receive the valuable carbon credits have both been suspended by the UN because they could not prove they had vetted the projects they had signed off on. Between them they have approved the bulk of projects under the scheme.